Overview of the SOE Reform in Vietnam pps

Table of Contents Recent Development of Vietnam’s SOE Sector ...4 Salient Features of the SOE Sector in Vietnam...4 Economic Activities ...4 Number of Enterprises...6 Capital Scale...6

SOE Reform in Vietnam

Background Paper

Prepared by Mekong Economics

November 2002

Table of Contents

Recent Development of Vietnam’s SOE Sector 4

Salient Features of the SOE Sector in Vietnam 4

Economic Activities 4

Number of Enterprises 6

Capital Scale 6

Employment Size 7

Geographic Distribution 8

The Role of SOEs in the Economy 10

GDP Share of SOEs 10

Job and Income Generation 12

National Budget Share 12

Economic Performance of SOEs 13

Policy Framework for SOE Development and Reform 18

Overview of the SOE Reform in Vietnam 18

Milestones in the Process of SOE reforms throughout Party Congresses .19

The Launch of Doi Moi at the Sixth Party Congress 19

The Seventh Party Congress 19

The Eighth Party Congress 19

Resolution of the 3 rd Party Plenum of the 9 th Central Party Standing Committee 20

Key Programs of SOE Reforms 25

Reforms in SOE Management Mechanism 25

Restructure of SOEs 25

Reorganization of General Corporations 26

Equitization of SOEs 27

Other Ownership Transformations 29

Debts and Assets Treatment 30

The SOE Reform Agenda: Achievements and Remaining Constraints 30

How are International Donors Supporting Reforms? 34

The SOE Reform: A Case Study of the Textile Sector 37

Ownership Structure of the Textile Sector 37

Restructuring in the Textile Sector 38

Bibliography 40

Abbreviations

CP Government (used in legal documents)

CPV Communist Party of Vietnam

GDP Gross Domestic Product

GSO General Statistical Office

HDBT Minister Committee (Government, now) (used in legal documents)

IMF International Monetary Fund

MOF Ministry of Finance

MOLISA Ministry of Labors, Invalids, and Social Affairs

ND Decree (used in legal documents)

NSCERD National Steering Committee for Enterprise Reform and Development

OECF Overseas Economic Cooperation Fund

QD Decision (used in legal documents)

SOEs State-Owned Enterprises

SRV Socialist Republic of Vietnam

TTg Prime Minister (used in legal documents)

Recent Development of Vietnam’s SOE Sector

Despite the gradual shift towards a market economy that commenced in 1986, and in spite of the

emphasis on state owned enterprise (SOE) reform and privatization in the structural adjustment

programs formulated since the mid-1990s, the state sector continues to play a leading role in the

Vietnamese economy The dominant position of the state sector is confirmed in official statistics and a variety of studies on the Vietnamese economy The following sections investigate the distinct features, the role as well as the performance of Vietnam’s SOEs to have an overall outlook at recent development

be more concentrated in hotel, restaurant, transportation and communication than central SOEs

1

Care should be taken in interpretation of these numbers because they are crude indicators It means that with these numbers, it is still difficult to assess truly the involvement of SOE sector in each economic activity because firm size and industry-specific characteristics are not taken into consideration An in-depth analysis of

Table 1: The Number of SOEs by Economic Activities

continued a policy of state-led industrial development

Figure 1: SOEs by Economic Activities in 2000

Commerce, repairing Hotel and restaurant Transportation and Communication Finance and credit

Other

Source: GSO (2002b)

In relative term, the largest share of SOE at the end of 2000 belongs to the manufacturing industries, about 28 percent of the total (see Figure 1) Except for the agriculture and forestry, the construction sector and the commerce and repairing sector settle at the next two top ones The domination of industries, construction and commerce in the structure of SOE sector implies that SOEs are contributing much to the process of industrialization and modernization of the national economy

Number of Enterprises

The number of SOEs has been decreased significantly since Doi Moi started Notably, in 1991 the government issued a decree on establishing and liquidating SOEs requiring that all state enterprises be

re-registered or closed (Decree 338-HDBT) As a result, the total number of SOEs was halved from

12,000 in 1991 to roughly 6,000 in 1994 with sharpest decline in local SOEs Such a fast downturn is attributable to about 2,000 mergers and 3,000 liquidations (CIEM, 2002)

The decline has kept going on recently In 2000 the number of SOEs is 5,531 out of the total of 39,762 enterprises in the whole economy (GSO, 2002b) By the end of 2001, 37 SOEs had been sold, 4

contracted out and 61 entrusted to labor collectives (Nhan Dan, 2002) In addition, by the end of June this year, the number of equitized enterprises was 780 (Vietnam Investment Review, 2002) With the aim

at acceleration of the SOEs reform, the number of SOEs will be much smaller than it is As planned, 2,622 SOEs will be transformed with 1,319 equitized, 562 sold, contracted or leased, 351 merged, 368 liquidated and 27 converted to administrative units (Saigon Times Weekly, 2002) These transformed SOEs are mostly small or loss-making ones

Capital Scale

SOEs are to be more capital-intensive than their private sector counterparts (see Figure 2) It is

resulted from history of access to cheap capital in terms of equity injections from the government as well as subsidized loans from the state banking system

Figure 2: SOEs vs Total by Structure of Capital Scale

Employment Size

Before 1986, together with cooperatives, SOEs absorbed a huge amount of employment Since Doi Moi, the employment size of the state sector has been gone down significantly, mostly caused by the massive downsizing program of the early 1990s In Figure 3, for the first three years of the last decade, the employment of SOEs shrunk sharply from about 2 million to just over 1.7 million At that time, one could witness the largest number of SOEs workers left their sector From that time on, the employment size of SOEs remained rather stable at around 1.8-1.9 million Despite the massive downsizing, SOEs are still over-staffed A recent analysis based on plant-level data by Belser and Rama (2001) indicates that as many as half of the workers would be redundant if SOEs were to operate fully as their private sector counterpart

Figure 3: Trend of SOEs Employment in the 1990s

Figure 4: Structure of Labor Scale of the SOE Sector in 1994 and 2000

Source: GSO (2002b)

Together with the massive downsizing, SOE sector has been structured toward the larger scale

production It is evident from Figure 4 that the percentage of SOEs that have less than 500 employees has fallen from 79.6% in 1994 to roughly 73% in 2000 Moreover, in 2000, 6.5% of SOEs have more than 1000 employees as opposed to 4% SOEs in 1994 This is regarded as a consequence of the merger and dissolution of small SOEs in the last decade

Geographic Distribution

In a country that is still massively rural, SOEs have concentrated in big cities and urban areas in the Red River Delta and the Southern East (OECF, 1998) Most central SOEs are located in two poles of the country, in which Hanoi and Hochiminh city are home to around a half of total central industrial SOEs (Table 3) However, while the number of central SOEs in the two cities has tended downwards, the number has increased in other provinces This phenomenon requires an in-depth analysis of government policies in the second part

Table 3: The Structure of Industrial SOEs by Provinces

Source: GSO (2000); GSO (2002a)

Figure 5: Local SOEs’ Employment by Regions

Source: GSO (2001)

Regarding local SOEs, it can be seen from Figure 5 that this type of enterprises has distributed equally

between the north and south regions Moreover, local SOEs have concentrated in Red River Delta,

Mekong River Delta and North East South Each region accounts for around one sixth to one fifth of

total SOEs labor force Surprisingly, this figure shows the under-representation of local SOEs in remote

and mountainous areas The local SOEs’ employment in northern west and central highland areas is far

much lower than in other regions Naturally, one can raise a question on the role of local SOEs in

socio-economic development of under-developed localities It is said that the development of SOEs should

ensure socio-economic development evenly and equitably among geographical regions But so far the

reality might not be as expected

The Role of SOEs in the Economy

As said above even under Doi Moi, SOEs have held the dominant role in the economic development

To assess truly its role within the whole economy, it is of interest to look at its contribution to GDP, job and income generation and national budget as well In this paper, it is ignorant about the role of SOEs in economic adjustment process due to lack of necessary data

GDP Share of SOEs

As shown in Figure 6: Contributions of SOEs to GDP (At Current Prices), from 1986 to 1991, the contribution of SOEs to GDP decreased moderately From that time on, the role of SOEs has been recovered Then, in the last 1990s, SOEs contributed around 30% to GDP (at the current price) The macroeconomic stabilization, high level of protectionism and FDI concentration on the state sector has consolidated the role of SOEs in the economy

Figure 6: Contributions of SOEs to GDP (At Current Prices)

Source: GSO (2000b); GSO (2002a)

Table 4 depicts a clearer picture of contributions of SOEs to GDP by sector Notably, most of GDP created by SOEs are attributable to firms working in industry, construction and service sectors Despite the declining share of SOEs in GDP in service sector, they still play a

considerable role with roughly 55% of GDP contribution Meanwhile, those in the industry and construction sectors have made upward GDP contribution over years though the growth rates are not as high as their private sector counterpart In contrast, SOEs play a far modest role in the agricultural sector This position has not been improved over the last decade

Table 4: GDP by Sector and Ownership 1995-1999 (% of GDP)

As government continues state-led industrial development, the contribution of SOEs to the industrial

output keeps being high Although the number of state-owned industrial enterprises has been shrunk

considerably, their output still accounts for much more than one thirds of the gross industrial output

However, their role has been declined over past years as shown in Figure 7 Accordingly, SOEs

accounted for more than 50% of industrial output in the mid-1990s, but their share had diminished to

nearly 40% by 1999 It was due to the declining number of industrial SOEs in the period, for instance

from 3,000 in 1988 to 1,821 in 1998 (UNIDO, 1999 and World Bank, 2001)

Figure 7: Share in Total Industrial Output by Ownership

Job and Income Generation

Before Doi Moi, SOE sector was a main source of labor demand, especially in urban areas Since the early 1990s, the sector has been restructured, thus its employment has been decreased, namely from 2.1 million to about 1.9 million over the last decade (MOLISA, 2001) As a result, SOEs have absorbed only around 5% of total labor force in 2000 (Figure 8) In case the government continues its SOEs reform program, the number of jobs created by SOEs is kept limited Moreover, it should be noted that

Vietnam is a young country with more than 1 million people entering the labor market per year (GSO, 2001) With only 5% of total labor force, SOEs has truly played quite a modest role in term of job creation

Figure 8: Share of SOEs’ Labor in Total Labor Force

is only a half of the story SOEs jobs also go along with valuable benefits such as higher job security, more generous old-pension regime, more flexibility with lower effort level, which are difficult to

monetarily quantify

National Budget Share

As shown in Table 5 the contribution of SOE sector to the national budget has been stable at about 23 percent, excluding that from oil If the oil revenue is included, the contribution has reached as much as over 40 percent recently The SOE sector has accounted for a large share of value-added tax, special consumption tax, corporate income tax, and natural resources tax (mostly from oil) If absolute terms is taken consideration, the budget revenue from SOEs has raised remarkably in this period, from VND 6,189 billion in 1991 to VND 45,000 billion in 2002 or up by 7 times during one decade (MOF, 2002)

Table 5: Budget Revenues in Selected Years in Percent of Total Revenues

Crude Oil Total SOEs

Crude Oil Total SOEs

Crude Oil

Total 100.0 23.1 15.9 100.0 22.9 23.3 100.0 23.0 19.4

Corporate income tax 18.5 39.3 36.8 24.8 39.1 38.8 24.4 42.9 32.9

Source: www.mof.gov.vn and Author's Calculations

Economic Performance of SOEs

This section aims to draw an overall picture of economic performance of SOE sector However, care should be taken because data on the indicators are not always among consensus

Table 6: Some Key Financial Indicators of SOEs in 1997

Unit: VND billion, unless otherwise indicated

The 100 largest The 200 largest Total*

Source: IMF (1999)

(*): The last column is derived from data set of 5429 SOEs

n/a: not available

Table 6 suggests that larger enterprises perform better than smaller ones Accordingly about 90 percent

of the largest enterprises show positive pretax profit while the average figure for the total SOEs is only 40.4% 100 largest SOEs have made as much as 58% contribution to the national budget among as many

as 5429 state enterprises (Table 6) This superior performance may be partly due to the monopolistic

position and preferential treatment by the State as well Typical monopolistic SOEs are

telecommunications, transportation, construction, electricity, and public utilities, to name a few These enterprises enjoy monopolistic market power and are reportedly very profitable since the prices they charge are very high In addition, the banking system in Viet Nam has been under-developed and suffered from burdensome regulations from the State, small sized firms including those in the State sector usually face difficulties in approaching preferential credit from large State-owned or foreign banks They must turn to other sources including unofficial ones, which result in their higher production costs Meanwhile large SOEs, which have close relations with the banking system dominated by large state commercial banks and have ability to get big, feasible and ambitious business projects, can easily access

to bank loans This results in cost distortion against small SOEs Besides loan-related cost, the

preference of highly skilled and well-educated labors to work in large firms also puts smaller ones in inferior position

However, more recent surveys on the state sector suggest that the performance of SOEs -both large and small scale ones - seems to have worsened A study by Mitsui and Wada (1998) reveals that while sales and other growth indicators showed a large increase, the profitability of most SOEs has deteriorated substantially with a half of SOEs in red A closer look at conglomerates reveals a worse reality Out of the 17 largest conglomerates that represent 50% of total SOEs’ capital, 12 are in the red or breaking-even (Saigon Economics Time, 2001) According to the results of the enterprises census at 1st April 2001 published by GSO (2002b), as many as 76.6% of SOEs are profit making in 2000 (see Figure 9)

However, data should be again taken with a grain of salt The inconsistencies in data collected by various sources and surveys are not uncommon A survey by the Ministry of Finance and IMF shows that out of 5,800 SOEs in 1997, only 40 percent were reported to be profitable, 44 percent were temporary loss-makers, and 16 percent were permanent loss-makers

Figure 9: Financial Performance of SOEs in 2000

Source: GSO (2002b)

There might be two major reasons for the weak performance of Vietnamese SOEs One is that

Vietnam’s comparative advantages in many of the industries where import-substituting SOEs operate are

Profit-making

76%

Loss-making 18%

Break even 6%

very weak Another reason is that Vietnamese SOEs appear to be subject to soft budget constraints Loss-making SOEs have systematically been rescued through the write-off of non-performing loans and cash injections from state-owned banks, the National Investment Assistance Fund, Social Security Funds, and other sources For instance, IMF (1999) notes that several of the most severely indebted SOEs were able to increase their total outstanding debt by 50 percent or more in 1997, mainly by recourse to the state banking system The softness of the budget constraint is particularly problematic because the incentives of SOE managers to maximize profit are poor Financial profit is not always the only objective of SOEs nor is the remuneration of the managers directly related to the enterprise’s economic performance Lacking individual profit-oriented owners, the objectives of SOEs are often defined by politicians, and may include a multitude of specific targets ranging from maximization of employment to regional policy objectives This means the performance is difficult to monitor because it

is hard to find appropriate performance measures for all objectives In addition the weights of the different objectives are seldom specified

As analyzing the SOEs’ performance, it is impossible not to mention the credit, loan and indebtedness of the sector The total credit to SOEs has continuously increased recently, from nearly VND 27 trillion in

1996 up to VND 70 trillion in 2000 (See Table 7) However, the share of SOE sector’s credit has fallen since late 1990s on, from over a half to over 40 percent of total credit to the economy in

2000

Table 7: Distribution of Credit, 1996-2000

Unit: VND billion, unless otherwise indicated

Table 8: Overdue Loans to Different Sectors

In terms of indebtedness, SOEs debt amounted to over VND 100 trillion (Table 6) and increased to

VND 382 trillion in 2000 (see Table 9)

Table 9: Some Indicators on Performance of SOEs in 2000

Source: GSO (2002b) p: 854-55, 1286-87, and 1380-81

As can be seen from Table 10 and Table 11, the debt/equity ratio of SOEs also raised from 138.8

percent in 1997 to as high as 274.8 percent in 2000, implying that SOEs have mobilized much debt

Then the financial situation of SOE has been more risky recently

Table 10: Key Financial Ratios of SOEs in 1997 (%)

Profit-making

Temporary loss-making

Loss - making

Source: IMF (1999) Table IV.2

Table 11: Indicators of Indebtedness and Financial Performance of SOEs in 2000

Unit: percent

Source: Calculations from GSO (2002b)

Although some debt ratios have gone upwards, in terms of profitability in the SOE sector, the pretax profit to total capital ratio was 3.1 percent and pretax profit to own capital ratio was 11.7 percent in

2000, which is a unwonted positive sign of performance in the sector

Concluding Remarks

No one can deny the role of Vietnam’s SOEs in the transition process However, to maintain its role in the economy in the next period, the new phase of further SOEs reform should be required Specifically, until now SOEs still remain a leading role in the economy but their contributions have been declined significantly over the last decade Moreover, SOEs’ bad performances have been a serious problem that the government should try its best to solve Then, it is of necessary to explore the government’ policies toward SOEs at the present and in the long-term vision The following part will be for this concern

Policy Framework for SOE Development and Reform

Overview of the SOE Reform in Vietnam

SOE reform in Vietnam commenced at the time of Doi Moi reforms in late 1980s The issuance of

Decision 217-HDBT dated 14/11/87 marked the first Doi Moi move towards a broad based SOE reform

program Since then there have been many Party and Government decisions including resolutions, legislation, decrees and ordinances towards SOE development and reform In accordance with those decisions, the government has implemented three major rounds of SOE reform over the last ten years The first round of SOE reform took place during 1990-1993 and concentrated on reorganizing and

strengthening business and production in the SOE sector in accordance with Decision 315/HDBT and on establishment, re-registration, and liquidation of SOEs in accordance with Decree 388/HDBT In the

second round that took place during 1994-1997, the government aimed at (i) reorganizing SOEs and

enterprise associations in order to establish general corporations (GCs) according to Decisions 90/TTg and

91/TTg; (ii) implementing the transformation of SOEs into joint-stock companies according to Decree 28/CP; and (iii) issuing the Law on State enterprises as the framework for enterprises to operate The

third round taking place from 1998 up to present has speeded up the equitization process of SOEs

according to Decree 44/1998/ND-CP and Decree 64/2002/ND-CP, the restructure of SOEs according to

Circular 20/1998/CT-CP, and the transfer, sale, contracting and lease of SOEs according to Decree

103/1999/ND-CP Decree 63/2001/ND-CP outlining the procedures for corporatisation of SOEs was

also issued

Major contents of these rounds of SOE reforms include (i) reforms on mechanism and policies towards SOEs, allowing SOEs to become more autonomous, self-responsible for their decisions and activities, and making SOEs to operate according to market mechanism; (ii) reforms on enterprise's planning, finance, personnel organization, and on the state administration with the tendency of eliminating “the organism in charge” of state organizations; (iii) allowing mergers, liquidations, and bankruptcy for

permanent loss-making SOEs which the state should not hold the ownership; and (iv) organizing,

strengthening, and developing GCs to build large economic groups to develop key industries that the state has to take control

The SOE reform process in Vietnam has obtained remarkable achievements such as introducing a new management mechanism, reducing the number of SOEs, reducing state subsidies, and granting more

have improved their performance, increased capital, and improves workers' benefits etc The SOE sector still plays an important role in the economy via their large contribution to state budget, export turnover; and help ensure economic stability of the economy

Next sections will focus on key Party and Government decisions and policies on the SOE reform over the past years

Milestones in the Process of SOE reforms throughout Party Congresses

The Launch of Doi Moi at the Sixth Party Congress

Doi Moi was launched at the Sixth Party Congress in late 1986 Although the Congress represented a critical turning point in policy direction, only limited details were provided about the specific policy reforms that would be implemented to bring about desired changes In a series of Party Plena following the Party Congress, the details of Doi Moi were discussed Therefore, first steps towards a broad based

SOE reform were only introduced when the Councils of Ministers issued regulations in Decision

the Sixth party Congress to give greater autonomy to SOEs and to introduce a socialist cost-accounting regime Details of this Decision will be presented in section

The Seventh Party Congress

The Seventh Party Congress renewed the commitment to greater SOE autonomy While the Party still maintained that SOEs were to continue to play a leading role in the economy, there were also calls for consolidation of the SOE sector, including the liquidation of non-viable enterprises, and the equitization

of non-strategic SOEs The 7th Party Congress called for pilot activities to dissolve or change the

ownership of enterprises that did not need to be retained understate ownership Resolution of the Second Plenum agreed to converse a number of eligible SOEs into joint-stock companies and this should be done on a pilot basis and under close guidance Then in late December 1991, the National Assembly approved a pilot equitization program and the government issued a decision to proceed this pilot program

The Eighth Party Congress

In the 8th Congress, it stressed the need for a greater focus on improving financial management of all SOEs, to rely on profitability indicators to evaluate the performance of SOEs, while also using social indicators to evaluate the efficiency of state public service enterprises The 4th Party Plenum emphasized that the immediate priorities were ensuring financial sector and macroeconomic stability, and coping with the unfavourable impact of the regional economic crisis, including a renewed focus on SOE reform

In the resolution of the 4th Party Plenum, priorities for enterprise reform included: accelerating the equitisation program; developing the legal basis for small SOEs (less than VND 1 billion in capital) to be merged, divested, leased, or contracted out under performance contracts incorporating State business enterprises as limited liability or joint-stock companies under the Company Law; promulgating

regulations to deal with supervision of enterprises with monopoly powers; and introducing clear

regulations imposing compulsory auditing and publication of annual reports

Resolution of the 3rd Party Plenum of the 9th Central Party Standing Committee

The Third Party Plenum called for further acceleration of SOE reform The direction viewpoint in this resolution includes: continuing to reform, develop, and raise the efficiency of SOEs to help SOEs implementing their role in maintaining the socialist orientation, stabilizing and developing Vietnamese economy, politics and society; reforming the management mechanism; continuing reform, rearranging, developing and raising the efficiency of SOEs are urgent as well as strategic missions; and raising the party leadership at all levels of authorities, and at all industries and branches

The future role of SOE sector includes: providing necessary public-utility goods and services for the demand of national defense and security, being the key force in boosting the economic growth and providing ground for the industrialization and modernization of the country with the socialist

orientation

The orientation in rearranging and developing business and public-utility State enterprises: State holds 100% capital of business enterprises operating in state-monopoly fields; state holds dominate shares or

100% capital of state enterprises operating in some specific industries and domains (See Decision

58/2002/QD-TTg) These enterprises are providing the necessary commodities for production

development, and spiritual and material improvement of rural people, and people in mountainous, remote, and deep areas

State holds special shares in some necessary cases; and State converses 100% state capital business enterprises into one-member liability companies with an owner is the State, or joint-stock companies in which the shareholders are state enterprises For existing public-utility SOEs, State holds100% capital of

Public-utility state enterprises operating in some specific industries and domains (See Decision

58/2002/QD-TTg) State holds dominant shares of Public-utility state enterprises operating in some

specific industries and domains (See Decision 58/2002/QD-TTg); and periodically the State adjusts the

enterprise-classification orientation in order to fit with the socio-economic development’s demand

Amending and Supplementing Mechanism and Policies

With respect to Business State Enterprises

Enterprises decide their businesses based on demand-supply relations in the market to meet the

objectives and their operational regulation The budget subsidies to enterprises will be eliminated Priority policies for industries, areas, and goods and services encouraged to develop, regardless of economic sector, shall be carried out

Law on competition shall be issued to protect and encourage enterprises in all economic sectors compete and cooperate in the general legal framework Price-control and profit regulations, the competition between state enterprises are needed in the fields in which state enterprises operate monopolistically The state issues efficiency-valuating criteria and SOE supervising mechanism Accounting, auditing, reporting, and information mechanisms shall be reformed Business operation and enterprise finance shall be performed publicly

About capital: enterprises can access and attract different sources to develop their businesses; they can actively treat the unused assets, and materials and goods that are accumulated stagnantly The State has mechanism to create enough capital for enterprises in 5 years 2001-2005 basically Fees of